State Farm loses punitive-damages appeal

Firms must respond to lawsuits to avoid such findings, state panel of judges rules

by Howard Fischer - Apr. 29, 2010 12:00 AMCapitol Media Services

Companies that fail to respond to lawsuits can't claim later that there wasn't enough evidence to support a judgment against them, the state Court of Appeals has ruled.

The judges rejected arguments by attorneys for State Farm Insurance that they should throw out an $80,000 award in punitive damages to some policyholders after a judge concluded the company acted in bad faith in handling their claim. The court said the arguments about whether punitive damages were merited were too late and immaterial.

The case stems from a 2005 incident involving Joyce Shurtleff and Joseph Miller. They had a renter's policy from State Farm.

According to court records, they were in the process of moving when the rental truck containing nearly all their personal belongings was stolen from a motel parking lot in Mesa.

After the theft, the couple lived in their pickup truck for about six weeks, eventually saving enough to move to Prescott. During that time, they nearly lost the pickup due to repossession and Shurtleff experience depression.

In January 2006, they sent State Farm an itemized list of items in the truck, calculating the value of the loss at $86,000. State Farm paid $500 that month, $10,000 in February and $25,232 in March for a total of $35,732; the personal-property limit on their policy was $58,834.

The couple sued, alleging breach of contract and a breach of the duty of good faith and fair dealing. When the insurance company failed to respond, a judge awarded them $23,102 in compensatory damages, the balance of the policy limit plus $20,000 in compensatory damages and an additional $80,000 in punitive damages.

State Farm subsequently filed a motion to set aside the punitive portion of the judgment.

Attorneys for the company pointed out that, under Arizona law, a court must conclude certain facts before awarding punitive damages. One of them is for the court to conclude, by clear and convincing evidence, that the defendant acted with an "evil mind."

Without that finding, they argued, the punitive award was improper. A trial judge agreed.

Appellate Judge John Gemmill said that there are procedures for setting aside judgments.

Among the reasons allowed would be "extraordinary circumstances" to remedy unjust judgments when there is no other legal remedy.

The problem here, Gemmill said, is that State Farm defaulted in the case and, from the record, remains in default by not having filed an answer to the couple's claim.

"State Farm's default constitutes a judicial admission that it is liable for punitive damages," the judge wrote, adding that the only issue left to resolve was the amount of damages.

He said the trial judge had no reason to independently examine whether the couple were, in fact, entitled to punitive damages.

And Gemmill said that the judge, after considering the evidence, concluded $80,000 was a proper amount, noting it was less than the couple's lawyer had requested.

Gemmill said trial judges can set aside punitive-damages awards when they conclude that a jury has come up with a number that is either excessive or unconstitutional. But he said State Farm never argued whether the $80,000 figure fit either definition.